1) Private

Public

2) 5%
To the people To the government
B $ 100,000 C $ 1,800,000 Benefit
D $ 60,000 S $ 110,000 Desbenefit
AC $ 200,000
Cost
P/F,5%,3 0.8638 Saves
Annual cost
B $ 2,000,000 $ 800,000
D $ 1,200,000
C $ 1,800,000 $ 1,862,760
A $ 172,760 0.4295
S $ 110,000

3)
5%
To the people To the government
B $ 100,000 C $ 1,800,000
D $ 60,000 S $ 110,000
AC $ 200,000

P/F,5%,3 0.8638

B $ 2,000,000 $ 627,240
D $ 1,200,000
C $ 1,800,000 $ 1,690,000
A $ 172,760
S $ 110,000 0.37

4 Fixed costs for Universal Exports are $680,000 annually. Its main-line export item is
sold at a revenue of $2.10 per unit with variable costs of $1.50 per unit.
How many units must be sold each year for breakeven?

A $ 680,000
C $ 2.1
Vc $ 1.5

Q 1133333.3

5 What would the annual profit be at sales of 1.9 million units?

The annual profit would be $
 S $ 1,900,000

$ 3,990,000
$ 3,530,000
$ 460,000

Brooke is evaluating two alternatives for improving the exterior appearance of her
Victorian-style house that she is remodeling inside. She plans to keep this as her home
for 20 more years. The house can be completely painted at a cost of $10,500. The
paint is expected to remain attractive for 5 years, at which time repainting will be
necessary. Every time the building is repainted (i.e., in years 5, 10, and 15), the cost
will increase by 20% over the previous time.
As an alternative, the exterior can be covered with a vintage-appearing vinyl-coated
siding now and again 10 years from now at a cost 27% greater than the present cost of
the siding.

At a MARR of 10% per year, what is the maximum amount that Brooke should spend
now on the siding alternative so that the two alternatives will just break even? Solve
using factors.
The maximum amount that Brooke should spend now on the siding alternative is $

i 20%
C -$ 10,500
Y5 -$ 12,600
Y10 -$ 15,120
Y15 -$ 18,144
-$ 10,500
P/F,10%,5 0.6209 -$ 7,823.34
P/F,10%,10 0.3855 -$ 5,828.76
P/F,10%,15 0.2394 -$ 4,343.67
-$ 28,496
-$ 7,823.34
-$ 5,828.76 -0.489585
-$ 4,343.67 -1.489585
-$ 28,495.77 $ 19,130.01

-$ 22,437.62

7
A civil engineer who owns his own design/build/operate company purchased a small
crane 3 years ago at a cost of $65,000. At that time, it was expected to be used for 10
years and then traded in for its salvage value of $10,000. Due to increased
construction activities, the company would prefer to trade for a new, larger crane
now, which will cost $80,000. The company estimates that the old crane can be used,
if necessary, for another 3 years, at which time it would have a $25,000 estimated
market value. Its current market value is estimated to be $45,000, and if it is used for
another 3 years, it will have M&O costs (exclusive of operator costs) of $22,000 per
year. Determine the values of P, n, S, and AOC that should be used
for the existing crane in a replacement analysis.
 market value. Its current market value is estimated to be $45,000, and if it is used for
another 3 years, it will have M&O costs (exclusive of operator costs) of $22,000 per
year. Determine the values of P, n, S, and AOC that should be used
for the existing crane in a replacement analysis.

P 45000
AOC 25000
N 3
S 22000

8
Based on company records of similar equipment, a consulting aerospace engineer at
Aerospatiale estimated AW values for a presently owned, highly accurate steel rivet
inserter as shown. A challenger has ESL = 2 years and AW C = $−46,500 per
year. The MARR is 20% per year.

The AW Value Is,

Number of Ye$ per Year
1 -62,000
2 -51,000
3 -49,000
4 -53,000
5 -70,000

If the consultant must recommend a replace/retain decision today, should the

company keep the defender or purchase the challenger?

Purchase the challenger

9 When should the next replacement evaluation take place, and under what
assumption?

2
CHALLENGER

10
Huntington Medical Center purchased a used low-field MRI scanner 2 years ago for
$445,000. Its operating cost is $500,000 per year and it can be sold for $175,000
anytime in the next 3 years. The Center’s director is considering replacing the
presently owned MRI scanner with a state-of-the-art 3 Tesla machine that will cost
$1.5 million.The operating cost of the new machine will be $220,000 per year, but it
will generate extra revenue that is expected to amount to $625,000 per year. The new
unit can probably be sold for $775,000 3 years from now. You have been asked to
determine how much the presently owned scanner would have to be worth on the
open market for the AW values of the two machines to be the same over a 3-year
planning period. The Center’s MARR is 9% per year.

The presently owned scanner should be worth $

A/P,9%,3 0.39505
 A/F,9%,3 0.30505
9% 109.00%
I $ 445,000 2.531295
OP $ 500,000
S $ 175,000 -$ 500,000 0.305055
MA $ 1,500,000 $ 53,384.58
OPM $ 220,000 -$ 446,615.42
EX $ 625,000
NW $ 775,000

-$ 500,000 -$ 592,575 -$ 592,575

$ 53,383.75 -$ 220,000 $ 405,000
$ 625,000 $ 236,414
-$ 446,616 $ 236,413.75 $ 48,839
$ 48,839
$ 495,455
$ 1,254,158

11
Two options are available for setting up a wireless meter scanner and controller. A
simple setup is good for 2 years and has an initial cost of $12,000, no salvage value,
and an AOC of $27,000 per year. A more permanent system has a higher first cost of
$73,000, but it has an estimated life of 6 years and a salvage value of $15,000. It costs
only $12,000 per year to operate and maintain.

If the two options are compared using an incremental rate of return, what is the
incremental cash flow in year 0? (Please enter negative cash flows with a minus sign.)
The incremental cash flow in year 0 is $

FC -$ 73,000
IC -$ 12,000

Y0 -$ 61,000

12 From the following data, use the conventional B/C ratio for a project that has a 20-
year life to determine if it is economically justified. Use an interest rate of 8% per year.

To the People To the Government

Annual benefits = $120,000 per year
First cost = $725,000
Annual disbenefits = $10,000 per year
Annual cost = $135,000 per yea
Annual savings = $30,000 per y

B $ 120,000
D $ 10,000

FC $ 725,000
AC $ 135,000
S $ 30,000

A/P 0.10185 B
 $ 73,841.25
$ 208,841.25

B $ 110,000
C $ 178,841.25
0.62

13
A government-funded wind-based electric power generation company in the southern
part of the country has developed the following estimates (in $1000) for a new turbine
farm. The MARR is 10% per year and the project life is 25 years.
Benefits: $45,000 in year 0; $30,000 in year 6
Government savings: $2,000 in years 1 through 20
Cost: $60,000 in year 0
Disbenefits: $3000 in years 1 through 10

NOTE: This is a multi-part question. Once an answer is submitted, you will be unable to
return to this part.

Calculate the conventional B/C ratio

B $ 45,000
B6 $ 30,000
S $ 2,000
c $ 60,000
D -$ 3,000

P/F, 10%,6 0.5645

P/A, 10%, 10 6.1446
P/A, 10%, 20 8.5136

PWB $ 61,935

PWD -$ 18,433.80

PWC $ 60,000

PWS $ 17,027.20

B $ 43,501.20
C $ 42,972.80
1.012

14 Calculate the modified B/C ratio

P/F, 10%,6 0.5645

P/A, 10%, 10 6.1446
P/A, 10%, 20 8.5136
 PWB $ 61,935

PWD -$ 18,433.80

PWC $ 60,000

PWS $ 17,027.20

B $ 60,528.40

1.009

15 Calculate the PI value.

$ 78,962.20

PI 1.32

16) The price of a car you want is $36,000 today. Its price is expected to increase by $1000
each year. You now have $23,000 in an investment account, which is earning 8% per
year. How many years will it be before you have enough to buy the car without
borrowing any money? (Use Goal Seek to determine the time taken.)
The time taken is determined to be

Price $ 36,000
Increase $ 1,000
Investment $ 25,000
i 10%

Y FC V
4.11 $ 37,004 $37,004.11 -$ 0.00

17
A professional photographer who specializes in wedding-related activities paid
$52,000 for equipment that will have a $2000 salvage value after 5 years. He
estimates that his costs associated with each event amount to $65 per day. If he
charges $350 per day for his services, how many days per year must he be employed
in order to break even at an interest rate of 6% per year?
The number of days required for break even is determined to be

FC $ 52,000
S $ 2,000
N 5
I 6%
V $ 65
Re $ 350

A/P, 6%, 5 0.2374

 A/F, 6%, 5 0.1774

$ 12,344.80
$ 354.80
-$ 11,990.00

$ 285
42.07

18
The two alternatives shown are under consideration for improving security at a county
jail in Travis County, New York. Determine which one, if either, should be selected
based on a B/C analysis, an interest rate of 7% per year, and a 10-year study period.

Extra Cameras (E New Sensors (NS)

First cost, $ 38000 87000
Annual M&O, 49000 84000
Benefits, $ p 104000 87000
Disbenefits, 16000

A/P, 7%, 10 0.14238 0.14238

B 88000 87000
16000 0
C 54410.44 96387.06
B/C 1.62 0.90

19)
Conventional and solar alternatives are available for providing energy at a remote
radar site. Use the incremental B/C ratio to determine which method should be
selected at an interest rate of 8% per year and a 5-year study period.

Method Conventional Solar

Initial cost, $ 200000 2400000
Annual cost, 500000 2000

A/P, 8%,5 0.25046

B 498000
C 2200000 551012
0.90

20
For some years, Mel has contracted with several major pizza retailers for home
delivery services. He uses a MARR of 12% per year in all business dealings. His current
van, purchased 10 years ago for $75,000, can be used for 3 more years, with an AOC
of $23,000 and an estimated $25,000 trade-in value. A better-equipped van will cost
$110,000, have an economic life of 6 years, an estimated trade-in value of $45,000, an
AOC of $32,000 per year, and will generate an estimated $27,000 per year additional
revenue. On the basis of these estimates, what market value now for the current van
will make the new van equally attractive? Solve by spreadsheet or factors, as
requested by your instructor.
delivery services. He uses a MARR of 12% per year in all business dealings. His current
van, purchased 10 years ago for $75,000, can be used for 3 more years, with an AOC
of $23,000 and an estimated $25,000 trade-in value. A better-equipped van will cost
$110,000, have an economic life of 6 years, an estimated trade-in value of $45,000, an
AOC of $32,000 per year, and will generate an estimated $27,000 per year additional
revenue. On the basis of these estimates, what market value now for the current van
will make the new van equally attractive? Solve by spreadsheet or factors, as
requested by your instructor.

The market value now for the current van that will make the new van equally
attractive will be

i 12% 6
$ 75,000
$ 23,000
$ 25,000
c $ 110,000 -$ 7,408.75 -$ 10,618.70
$ 45,000 $ 23,000
$ 32,000
$ 27,000 -$ 26,209.95

A/P, 12%, 3 0.41635

A/F, 12%, 3 0.29635 -$ 26,755.30
A/P, 12%, 6 0.24323 -$ 32,000
A/F, 12%, 6 0.12323 $ 27,000
$ 5,545.35
-0.41635 -$ 15,591.25 = -$ 26,209.95
-$ 10,618.70
$ 25,504
To the people
$ 100,000 per year beginning now
$ 60,000 per year
To the government
$ 1,800,000 Now
$ 110,000 per year
$ 200,000 Every 3 years

$ 40,000
$ 90,000 105%
$ 30,000 1.157625
$ 120,000 0.863838